Will higher gas prices derail the economy?

Cesar Salcido fuels his tractor trailer truck at the Pilot Truck Stop off the I-905 in Otay Mesa before the long trip to Houston. Higher gasoline prices are affecting everything from the cost of transporting goods to growing crops. NELVIN C. CEPEDA / U-T SAN DIEGO

Cesar Salcido fuels his tractor trailer truck at the Pilot Truck Stop off the I-905 in Otay Mesa before the long trip to Houston. Higher gasoline prices are affecting everything from the cost of transporting goods to growing crops. NELVIN C. CEPEDA / U-T SAN DIEGO

Best gas prices?

As gasoline prices continue to shoot skyward, oil is quickly replacing the jobless rate as the nation’s chief economic concern.

On Friday, a gallon of regular gasoline in San Diego averaged $4.37, up 57 cents from a year ago. It’s little better across the nation, with drivers paying an average $3.74 per gallon. Although that’s well below the national record of $4.11 a gallon set in July 2008, the question on everyone’s minds is whether higher gas prices will derail the economic recovery?

Although that’s not likely at this point in time, rising energy prices tend to have a lagging economic impact, said James D. Hamilton, economics professor at the University of California, San Diego. Unless income keeps pace - which isn’t happening for most people now - higher fuel costs will eventually displace other expenditures, he said.

In the meantime, Republicans are pushing for more oil drilling and construction of a fuel pipeline from Canada. President Obama is using rising fuel costs to renew his campaign to halt government tax breaks for the oil industry.

But oil industry analysts say there’s relatively little either party can do to rein in the price rise.

What do you think?

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Iran - and its warnings about blockading the Gulf of Hormuz if the U.S. and Europe continue to tighten economic sanctions - remain the main reason for the price spike.

“America is producing more oil today than at any time in the last eight years,” Obama said this week.

In 2011, the U.S. produced 173 million barrels of oil, the largest total since 2003, which reduced the need for imports, according to data from the U.S. Energy Information Administration. Last year, the U.S. imported about 44.8 percent of the oil it used, down from a peak of 60.3 percent in 2005.

Republicans say many of the increases in U.S. oil production are tied to actions of the Bush administration.

However, the White House said it is opening oil fields at about 3 million acres per year.

But if we’re drilling in so many places, why are prices still going up?

The problem is that oil is a global product with globally based pricing. U.S. production is too small to make a noticeable dent in the global prices, said Severen Borenstein, professor at the Haas School of Business at UC Berkeley.

So the question remains. Can the economy withstand the gas price increase we’ve seen so far? “Yes,” says David Kelly, chief market strategist at J.P. Morgan Funds.

The reasons:

•Jobs. The country has added 2 million over the past year. Those 2 million people with paychecks will spend them, which helps the economy.

•Job security. Jobless claims, the best measure of layoffs, are at a four-year low. Fewer Americans are worrying about losing their jobs, so they can take the punch of higher gas prices.

•A steadier housing market, the Dow Jones industrial average’s clearing 13,000 and other signs of an improving economy also help. Add them together and consumer confidence is the highest in a year. More confidence makes people more likely to keep spending on other things even if gas goes up.

The key is what impact gas prices have on other spending in the economy. All consumer spending isn’t equal. A dollar spent on gas has less of an impact on the U.S. economy than a dollar spent in a restaurant or at a baseball game. The U.S. is an oil-importing country, so many of the dollars spent on gas leave the country.

The rule of thumb among economists is that a 25-cent increase in gas knocks $25 billion to $30 billion off consumer spending in a year and lowers economic growth by 0.2 percentage points, says Carl Riccadonna, an economist at Deutsche Bank.

The price of gas averaged $3.51 last year, so a move above $4 should only divert $60 billion from consumer spending this year, Riccadonna says. Last year, it drained $120 billion.

“There’s rising energy costs, and then there is households’ ability to handle those rising costs,” Riccadonna says.

So far, households appear to be keeping up. Economists think the economy will grow at a 2.2 percent annual rate in the first half of this year, compared with 0.9 percent while gas prices crept up in the first half of last year.

An oil shock would change everything. In the event of an Iranian blockade, oil would skyrocket - think $150 or beyond - easily topping the record of $145 set in 2008.

Here's a look at how rising oil prices might affect key areas of the San Diego economy.

Tourism

When prices for gasoline and jet fuel prices soar, vacationers become reluctant to travel far from home. Skip Hull, economist with San Diego market analysis firm CIC Research, said that often a gas price hike means an uptick of day-trippers from Los Angeles, who decide to vacation within Southern California, but a decrease in tourists from farther away, who tend to stay longer and spend more money. On the other hand, if the price hike is short, the impact can be different. During last year’s price peak, overnight visitors rose 4 percent from the previous year, but the number of day trippers declined. One reason: overnight visitors often book their travel months in advance.

Transportation

With diesel fuel prices averaging $4.50 per gallon in San Diego County, it costs around $1,250 to fill up a 280-gallon tank on a long-haul truck compared to around $850 a year ago. Even a relatively small 75-gallon tank costs around $335. Eventually, those prices get passed onto consumers, sometimes amounting to only a few pennies extra per item. But for independent truckers, who often have to shoulder a large chunk of the fuel costs, the price hikes deliver a powerful punch.

Consumer sentiment

For consumers, the billboard at the local gasoline station is often a primary indicator of the health of the economy. When prices go up, consumer confidence sours, which implies they will be less likely to buy big ticket items. This year, the impact hasn’t been too great, since the bad news at the gas pump has been countered by some good news in other areas, including an improving job market, rising stock prices and rising salaries and income. In general, a 10 percent rise in the gasoline prices cuts consumer confidence by a relatively strong 1.4 percent to 1.5 percent, says IHS Global Insight, an economic analysis firm. But when the price crosses a significant milestone - say, $4 or $5 — the drop is far steeper.

Food prices

Besides relying on oil for the tractors that plant and harvest their produce and the trucks that take it to market, farmers use petroleum as a key ingredient in many fertilizers. With prices getting higher on the farm, the cost of produce has already been rising in the supermarket. Last year’s 22 percent jump in local gasoline prices in San Diego County was accompanied by a 6 percent jump in food prices, according to data from the Bureau of Labor Statistics. In comparison, the price of all other items in the consumer price index — most of which are less affected by oil prices — rose 1.4 percent.

Retail sales

When consumers spend more money at the gasoline pump, they have less money to spend on other items. Alan Gin, economist at the University of San Diego, calculates that for every 10 cent rise in the price of gasoline, between $8 million and $10 million is taken out of the local economy, putting a damper on economic growth. If the price of a barrel of oil rises by $10 and stays there for a year, it can wipe out about 0.4 percent of a driver’s disposable income, according to IHS Global Insight, an economic analysis firm.

Economic growth

When adding all those factors together, IHS Global Insight estimates the economy’s growth rate will likely make the national economy’s growth rate slow by a relatively miniscule 0.1 to 0.2 percent this year. “Any drag in growth is undesirable in the face of an already slow recovery,” the IHS report says. “But the bad news from oil and gasoline prices is not yet enough to put the economy back into recession.” On the other hand, the report warns, if gasoline tops $5 per gallon — which most economists say is very unlikely — “we would be staring recession in the face.”